CPF is a compulsory savings plan for working Singaporeans and permanent residents. I view it as a good thing although not everyone can appreciate forced savings as much as I do. I used to be a spendthrift in my younger days and found it challenging to put aside savings, often spending my ‘savings’ after just a short while. Hence, compulsory saving is good for spendthrifts like me to ensure I have enough for retirement.
Helps me pay myself first
Every month, a part of my pay is stashed away and deposited into my CPF accounts without any action on my part. This is a key personal finance principle of “paying myself first” – save before we spend rather than spend and save whatever remains. After letting my CPF accumulate for years, I was pleasantly surprised by how much I had saved after working all these years.
I did a basic projection for a 25-year-old who makes $3,000 a month – he will receive CPF contributions of $690 (i.e. 23% of monthly wages for those aged 35 and below) in his CPF Ordinary Account (CPF OA) every month. The base interest rate for CPF OA is 2.5% per annum. After working for 10 years and assuming the salary remains constant, this person would have close to $94,000 in his CPF OA. Without having to lift a finger, he could easily end up with a close 6-digit savings through the power of compounding.
Of course, everyone’s situation and life circumstance may be different, and the amount of CPF savings would vary. Regardless of the amount, we cannot deny the power of compounding – it can be used to build our wealth, slowly but surely.
Ensures my savings remain safe
Investing in stocks remain my favourite investment option. One of the reasons is that it offers high potential returns, which allows one to compound one’s wealth at a faster rate. But it’s not always smooth-sailing and it involves risks.
What makes stock investment so difficult is the need to handle occasional crashes that could wipe out much of your investment capital, which can be highly stressful. We just had an episode of this due to COVID-19 – investors became fearful and panic selling was rampant. Stock investors had to face losses and go through the emotional turmoil that comes along with it. Ultimately, there’s no free lunch in this world and you have to subject yourself to higher risks and pressure for higher returns.
The importance of CPF becomes significant under such market conditions. It offers me peace of mind as part of my wealth remains intact, because my CPF savings were not affected by the market turmoil. My CPF savings is guaranteed and will not swing into losses, unlike my stock portfolio. In fact, the savings continues to grow with interest rates of up to 5% per annum* even in times of financial uncertainties. This is what CPF savings does best – it provides a foundation for my retirement.
*Includes extra interest on the first $60,000 of your combined CPF balances (capped at $20,000 for Ordinary Account). Please refer to the CPF interest rates page for more details on extra interest.
Retirement is my own responsibility
My dad is a spendthrift and I probably inherited the spending genes from him. Despite that, my father’s CPF has helped him build up his retirement savings over the years, even though he didn’t exactly plan for it.
I wouldn’t want to be a burden to my children so I must take care of my own retirement needs. I want my children to lead good lives by having less things to worry about. I want them to have the space and resources to pursue their dreams.
CPF provides a safety net and I am building on that by saving and investing so that I can set aside more retirement funds as a buffer.
Teaching my children about money
I guess many parents find it difficult to teach children about money. I think one of the issues is that it is difficult to value money when they don’t have to work for it.
I have two boys and I believe that teaching them about money is my responsibility. Instead of preaching financial literacy to them, I prefer to show them through my actions. I am doing top-ups to their CPF accounts each year. Their savings will compound over decades and would snowball to something meaningful. They should be able to appreciate it better when they need to use these savings, such as when they are buying their first home.
Maybe some of you might think that you can only have CPF savings when you earn your first paycheck. That is not true.
You can contribute money to your kids’ CPF accounts when they are born (in fact, every Singaporean child will receive the MediSave Grant for Newborns of $4,000 in their MediSave Account at birth). I find that this is better than saving for them via bank accounts due to the higher interest rates (up to 5% per annum) offered by CPF. Moreover, I don’t want them to have the ability to spend the money right away once they take control of the savings in adulthood. Just in case they aren’t ready and squander the money away. The CPF savings would come in handy for important life milestones such as housing or retirement.
At some point in time, probably on their 21st birthdays, I would show them their CPF accounts and tell them how the numbers came about. I will take the opportunity to teach them about the value of saving and compounding. I hope that they will keep the momentum of saving going and learn to plan ahead financially for their future, just like how CPF helps each of us set aside savings to meet our future needs.
It’s never too early
It is hard to be appreciative of CPF because we cannot see the rewards of the system immediately. Retirement often sounds like a faraway destination especially if you are still young and it is human’s nature to prioritise present needs and wants.
CPF forces us to start saving the moment we collect our first paycheck and I think this is a good thing. Without which, more people could face a lack of money to fund their retirement. I have also seen the benefits of CPF for my dad who was a spendthrift all his life.
For the investors, you should also appreciate that CPF has provided – a safety net for your retirement so that you can afford to take more risks with your cash and invest in higher yielding assets such as stocks. We tend to appreciate the slow and steady CPF during stock market crashes where our CPF savings continue to grow while our stock portfolio value decline. Not everything is about high returns, we need some parts of our wealth to be protected against bad events too.
Most importantly, money can affect our lives if we do not have enough of it. Any individual who doesn’t take care of his finances would eventually affect somebody else. If my parents didn’t have retirement funds, I would have to give them more allowances. If I do not take care of my retirement, my children will have to support me in the future. We never want our loved ones to lead less deserving lives because of us. So, we have to play our part and make our own retirement, our responsibility.
Learn more about how you can kickstart your retirement plan and maximise your CPF savings here.
This is a sponsored post by CPF. The views belong to the author.